Reinventing Flying February 2020 The aviation sector is facing turbulent times, with increasing regulation, rising costs, critical passengers and technical problems presenting major challenges for airlines. What is the future of flying? We take a look ahead. 2 Contents 1 Introduction 4 2 Civil aviation is still a global growth market 5 3 Regulatory challenges 7 3.1 Regulations in Germany 7 3.2 Application of the EU ETS and its impact on the aviation sector 7 3.3 CORSIA 8 3.4 Implications of the proposed regulations for airlines 8 4 Ways out of the crisis 11 4.1 Greater efficiency through the modernisation of fleets and engines 11 4.2 Possible alternatives to fossil kerosene in aviation 13 4.3 Hybrid and electric drives – alternative technologies of the future 14 4.4 Carbon offsetting models 16 5 Complementary approaches to improving aviation’s carbon footprint 18 6 Summary 19 3 1 Introduction A sector in turmoil Twenty years from now, will electric jets be carrying 300 passengers from Frankfurt to New York? While cars made by the likes of Tesla mean that the fantasy of a future where all ground transport is electrified no longer seems far-fetched, it is still beyond imagination in aviation. At the same time, the idea that climate change will bring an end to flying by 2040 seems just as absurd as the possibility that aircraft will continue to burn vast quantities of kerosene. So, what does the future hold for flying? What are the solutions for a sector where competition is intense and constant cost pressures are a defining feature? Tighter regulation in response to rising global CO2 emissions has further aggravated an already difficult environment for airlines. The discussion in society about whether civil aviation still makes sense (flight shaming) is another potential burden for the industry, and the airlines’ ‘licence to fly’ appears to be under threat. Against this backdrop of change and uncertainty, it is often forgotten that civil aviation is still a growth area, especially in emerging markets. Demand for more transport options remains high. In this context, investors have to ask themselves which companies have the best response to the changing external factors and higher costs. And which are successfully using the growth of the industry to present themselves in a positive light compared to the competition? This paper first examines the regulatory framework and then focuses on technological innovations in aircraft construction and fuel. Finally, it takes a look at the future of flying, at new applications and at alternative transport and logistics concepts. 4 2 Civil aviation is still a global growth market Civil aviation is the fastest-growing mode of transport worldwide. The International Air Growth unabated Traffic Association (IATA) predicts annual revenue increases of 3.7 per cent up to 2037, despite headwinds and the number of passengers per year could almost double to around 8.2 billion over this period. The main driver will be the rise in passengers from Asia and the Middle East. Figure 1 shows the regional growth predictions. Accordingly, demand for airplanes remains high, not least due to a substantial pent-up demand in the expanding emerging markets, while new airplanes featuring innovative technologies allow companies to rejuvenate their fleets and increase efficiency. This is particularly important with regard to kerosene consumption and CO2 emissions. Figure 1 Regional growth around the world Growth in traffic between 2017 and 2037 in passenger kilometers, by world region 2017 2037 Source: https://www.umweltbundesamt.de/sites/default/files/medien/1410/publikationen/uba_fb_wohin-geht-die-reise.pdf, Umweltbundesamt That is all well and good for airlines and aircraft manufacturers, but as a consequence of this unfettered growth the absolute volume of CO2 emissions from civil aviation is also increasing. And this despite the fact that airlines have already been continuously improving their CO2 efficiency for some time. While the aviation sector currently accounts for only around 2.8 per cent of global CO2 CO2 emissions are emissions, that figure is set to rise. By 2040, the aviation industry is likely to be the also increasing sector contributing most to global demand for petroleum-based products. According to calculations by the International Energy Agency (IEA), the aviation industry would have to achieve annual efficiency gains of 3 per cent by 2040 to meet the Paris climate targets. Between 2014 and 2016, it only managed to achieve efficiency gains of around 1 per cent a year. The prospect of meeting the targets set in Paris is still a long way off. 5 The operational success of companies is in conflict with the need to reduce their carbon footprint. If the aviation sector wants to maintain its fundamentally positive prospects in the long term, it must decouple future growth in the volume of traffic from the associated emissions. It appears that CO2 emissions can only be reduced – and the ‘Net zero emissions by 2050’ project be achieved – through a combination of innovative technology, regulatory requirements for pricing CO2, and improved organisation and logistics throughout the transport sector. Figure 2 Instruments for reducing CO2 emissions in aviation CO2 pricing EU-ETS, CORSIA and voluntary offsetting Technology Organization Aircraft manufacturing, Single European Sky renewable fuels, carbon- move to rail, neutral airport operation high capacity utilization Source: Union Investment 6 3 Regulatory challenges In order to comply with the Paris Agreement’s requirements to limit the rise in temperature to a maximum of two degrees Celsius, agreements and regulations are being pushed through and implemented at national and international level. 3.1 Regulations in Germany In Germany, the climate package recently passed by the German government includes National and … several regulations designed to reduce CO2 emissions in the aviation industry. These include making rail travel more attractive and supporting new, more CO2 efficient fuels, which are also to be used by aircraft in the future. The package also incorporates an increase in air transport levies and a ban on dumping, especially on short-haul routes. This national climate package complements the existing European rules on trading CO2 certificates. 3.2 Application of the EU ETS and its impact on the aviation sector Since 2012, flights starting and ending within the EU have been covered by the European …European efforts Union Emissions Trading Scheme (EU ETS). The ETS is the EU’s main tool for meeting its to reduce CO2 climate policy goals. This market-based instrument is designed to achieve a 43 per cent emissions have a reduction in CO2 emissions by 2030 compared with 2005 in sectors such as power combined effect generation and industrial production plants. Until 2016, the ETS only exerted limited financial pressure on airlines due to the low price of CO2. The continual reduction of the CO2 cap combined with a system-related shortage of available CO2 certificates since April 2017 caused the price of CO2 to rise again. The average price in 2018 was €15; currently companies have to pay around €10 more per certificate. For the first time in more than a decade, the ETS is presenting European airlines with a financial challenge – but it is also having the desired effect. The EU ETS has been designed in such a way that the CO2 price is expected to rise for The cost of CO2 the aviation industry due to the continual reduction of the CO2 cap combined with the certificates will shortage of available certificates. At the same time, the sector’s CO2 emissions will increase affect airlines more by around 2.5 per cent annually. Assuming a CO2 price of €25, the cost to airlines could severely in the amount to more than €1 billion in 2019, almost twice as high as in 2018. Even higher CO2 future pricing in the ETS will increase costs further, representing an ever-larger expense for the affected airlines. These companies need to find a solution as a matter of urgency. The EU abandoned its plan to incorporate air traffic between the European Economic Area and non-EEA countries into the EU ETS following strong resistance from international airlines and in view of the climate protection negotiations within the International Civil Aviation Organization (ICAO). The ICAO has already developed a global, market-based system for limiting emissions from aviation: CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation). 7 3.3 CORSIA International agree- As a rule, international agreements to limit global CO2 emissions from civil aviation are ment to reduce CO2 always preferable to local solutions. Because of the high volume of air traffic in the United emissions based on States and the strong growth in Asia and the Middle East, it is crucial that these countries offsetting models and regions are included in a binding agreement to reduce CO2 emissions. It was agreed in the Kyoto Protocol that the International Civil Aviation Organization (ICAO) should regulate targets and instruments to reduce CO2 emissions. In 2016, the ICAO decided to introduce the CORSIA CO2 pricing instrument with the objective of capping the future rise in CO2 emissions from international aviation at the 2020 level. This means that CORSIA will not limit future CO2 emissions per se; it will only limit further growth. Not enough Under CORSIA, airlines will make payments, known as carbon offsets, for any emissions offsetting projects that are too high. The income from CORSIA is to be used to finance a range of projects available to reduce CO2 emissions, such as reforestation programmes. What CORSIA lacks so far are binding standards for how the rise in CO2 emissions, in particular, is to be limited. The number of projects is also insufficient to achieve a significant reduction in CO2 emissions.